HOW A COMPANY ASCERTAINS DIVIDEND FROM PROFITS

‘Divisible profits’ means the profits that the law allows the company to distribute to the shareholders by way of dividend. ‘Profits available for dividend’ has been held to mean the profits that the directors consider should be distributed after making provision for depreciation or past losses, for reserves or for other purposes.

A proposal for declaration of dividend involves various considerations like the annual working of the company, future prospects of the company’s business, building up of adequate reserves for future expansion, etc. Simply because the company’s accounts disclose profits in any year, it does not follow that declaration of dividend is a must. The concept of ‘divisible profits’ is undefined and is a highly relative term. The quantum of profit, the rate of dividend previously maintained, tax liabilities, employees’ claim on bonus and similar other factors that are likely to claim a share in the profits have to be carefully scrutinized.

 The question that would arise is as to how profits are calculated for this purpose. Dividend can be paid by a company:

-out of the profits of the company for that year after providing for depreciation and/or

-out of the profits of the company for the previous financial year or years arrived at after providing for depreciation and remaining undistributed or

-out of moneys provided by the Government for the payment of dividend pursuant to a guarantee given by the Government.

Excepting this, one cannot get any guidance from the Act as to how the profits are to be calculated for the purpose of payment of dividend. Every profit and loss account of a company should give a true and fair view of the profit and loss of the company for the financial year. It should be noted that the Act provides for details guidelines for computation of profits for the purpose of managerial remuneration, payment of donations to charitable and other purposes not connected with the business of the company.

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